Q19 : Is it that the short seller is the lender (in its solution on P.160) ? Q23 : Why answer C can not be the correct answer ? (solution on P.160)
please post paraphrased ques, i know they got that copyright thing
Q19 : Statement The quality of collateral as well as short seller’s position affect the repo rate. In its solution both short seller and lender are mentioned. Is it that the short seller here is the lender (of bond) ? Q23 : Pension plan Asset’s duration : 6.2 Liability duration : 10.2 The plan should be most concerned about a A. flatttening of the yield curve B. steepening of the yield curve C. large parallel shift up in yield curve Correct answer is A in its solution Why answer C can not be the correct answer ?
Hi, No books in front of me, so gonna try and wing this. In the second one, Liability duration > Asset duration. When the yield curve fattens, the long end of the curve falls right? So which means liabilities increase more than assets. This is obviously a concern. When curve steepens, liablities would fall by a greater amount. Which would be a good thing, cuz u get a surplus. Parallel shift, not very sure, but I am guessing things would remain the same. Thats in simple words off the top of my head.
AMC Wrote: ------------------------------------------------------- > Q19 : Statement > The quality of collateral as well as short > seller’s position affect the repo rate. > > In its solution both short seller and lender are > mentioned. > Is it that the short seller here is the lender (of > bond) ? I believe you are confused about the 2nd part of the q. I will try to take a shot at it. Lender may be or may not be the short seller. Do not confuse the two things here. But when stock is shorted, lots of them, there’s more demand for the that shorted stock then normal…will hold value better. > > Q23 : Pension plan > Asset’s duration : 6.2 Liability duration : > 10.2 > The plan should be most concerned about a > A. flatttening of the yield curve > B. steepening of the yield curve > C. large parallel shift up in yield curve > Correct answer is A in its solution > > Why answer C can not be the correct answer ? Are you clear about this now?
derswap07, Q19 : I get it now. Q23 : What will happen in scenario of answer C ?
AMC Wrote: ------------------------------------------------------- > derswap07, > Q19 : I get it now. > Q23 : What will happen in scenario of answer C ? I think Sparty gave you good answer for that. What is your confusion?
in answer C, the upward shift would cause liabilities to decrease more than assets since liabilities’ duration is higher. all else equal, this would end up being a positive for the company, so they shouldn’t be concerned about the possibility of a yield curve shift, they should be hoping for one.
I see your confusion here. For answer C, they say that there is a parallel shift. Now think about it for a minute. It lifts up the whole curve. Values change by the same amount. It really does not matter. When the curve inverts, your reasoning comes into play. Liabilities value increase more than assets because they had higher duration. Lower rates, higher PV, higher value of liabilities. Hope this helps.
Yes, I get it now. TKVM !
dspapo & derswap07, Sorry I come back here again because I think there are 2 scenarios to answer C. 1. Upward large parallel shift As dspapo said, liabilities to decrease more than assets since liabilities’ duration is higher. This is good. 2. Doward large parallel shift Liabilities to increase much more than assets since liabilities’ duration is higher. This shall be a greater concern than in the case of flatttening of the yield curve, right ? This is my original consideration. Correct me if I am wrong !
Wow, I was about to post the same question Q23. Now i get it. The flattening of the curve would increase the yields in short to medium term (2-5 yrs range) resulting in decrease in their prices (assets down). While decrease in yields at higher maturites 10+ would result in increase in their prices (liabilities up) This would result in adverse impact to surplus. For large parallel shift up, assets and liabilites would both get impacted but liabilities will reduce more than assets. However, the impact is not as severe as a flatenning of the curve in which assets go down but liabilties go up.
I think the impacts shall be on relative basis (increase/decrease in market value of asset vs., increase/decrease in present value of liability). IMO, a doward large parallel shift in yield curve shall be the greatest concern. Correct me if I am wrong !